MAY ORDER, WON’T ORDER
While the United Arab Emirates has bankruptcy legislation, the statute has never been tested by the kind of multi-billion dollar, multi-jurisdictional case which a Dubai government-related entity would represent.

Lawyers and bankers complain the legislation is out-of-date – especially in terms of criminalising anyone who defaults on debt – and is open to a judge’s interpretation, which means two identical cases could yield vastly different rulings. Also, bankruptcy legislation is spread across several different laws.

The authorities have recognised its limitations and a new insolvency law is being drafted, according toJames Farn, a partner at Hadef & Partners, which along with Clifford Chance is drawing up the legislation.

“It attempts to bring in best practice from insolvency regimes in a number of other major legal jurisdictions,” Farn said.

However, the new law won’t be in place in time for the current wave of restructurings.

In the 2011 World Bank Ease of Doing Business report, the UAE was ranked 33rd overall globally, but came 134th on enforcing contracts and 151st on resolving insolvencies.

The current insolvency legislation is weighted towards creditors driving a court process to get their cash back, according to Farn. And the process is uncertain.

“One thing that a creditor wants to avoid is to enter into a procedure which may take ages and ages to finish and which may involve spending a lot of money in order to get your money back,” he said.

The new bankruptcy law may ease debt restructurings with greater provision for out-of-court negotiations between parties. In addition, the availability of “cram-down” provisions – where a minority of creditors can be forced to accept a restructuring agreement if it is acceptable to the majority – should prevent debtors from being held hostage by a few unruly creditors.

But it will still be difficult to seize assets – even if they are pledged as collateral – since land ownership in the UAE is on the whole restricted to citizens, with some provisions for nationals of other countries in the Gulf Cooperation Council.

So international banks involved in a state-linked corporate restructuring would not be able to take control of assets and sell them on to realise their dues, as would happen in the West.

And the new law contains the same potential flaw as the existing legislation: it requires a UAE judge to rule against a government-owned entity – something which appears unlikely.

While Farn would not be drawn on whether a court would sanction anyone at a government-owned commercial entity which got into debt difficulties, he acknowledged that a court might be slightly wary of acting against such companies.

“The new draft law says the court may order, it doesn’t say the court shall order,” Farn said.

Banks for their part are wary of upsetting the authorities. That is making them cautious as they start to consider legal action in restructurings, since they do not want to damage future business opportunities.

“The banks are very aware of the ownership of the company and the prominence of the name, its importance to Dubai,” the Dubai-based banker said of the Dubai Group negotiations.

“The banks don’t want the negative publicity of legal action and insolvency for a company of this profile.” (Editing by Susan Fenton)